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Will there be blood?

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I just read a very compelling interview with respected Harvard historian Niall Ferguson. Here’s the interview by the Toronto Globe and Mail, and here’s a synopsis of it. Ferguson’s picture of the near-future is even uglier than most.

For one thing, he says this downturn, which he dubs the Great Recession, may cause globalization to unravel:

When you look at the way trade has collapsed in the world in the last quarter of 2008 – countries like Taiwan saw their exports fall 45 percent – that is a depression-style contraction, and we’re in quite early stages of the game at this point.

Ferguson also predicts war — a series of small conflicts around the globe:

There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out that have been dormant. It will topple governments that were moderate and bring in governments that are extreme.

But Ferguson believes the US will weather the Great Recession better than most countries:

Partly because they can throw so much at it, and they can do it at a lower cost than anybody else, because the U.S. retains the safe-haven status, which makes the world so unfair.

Here is the world’s biggest economy, which gave us subprime mortgages, rampant securitization, the collateralized debt obligation, Lehmann Brothers, Merrill Lynch. It is, in a sense, the fons et origo (source and origin) of this crisis. And yet, because it retains safe-haven status, in a global crisis, investors want to increase their exposure to the U.S. Hence, the dollar rally. Hence 10-year Treasuries down below 3 per cent yields.

It’s almost paradoxical that an American crisis … reinforces the status of the United States as a safe haven.

Finally, through all this doom and gloom, Ferguson sees opportunity:

There are some fantastic investment opportunities that pretty soon are going to start attracting buyers. The returns on the supersafe, highly liquid U.S. Treasury portfolios are next to nothing. The potential returns from buying distressed assets, or from buying companies that can’t roll over their debt, are double digit.

So any individual institution liquid enough and not leveraged can start playing this game, and will play this game. This is going to be the beginning of a whole new investment strategy, in which companies that can’t roll their debt over end up being sold at bargain basement prices, or broken up and their assets sold at bargain basement prices, in very, very large numbers. … Call it the global foreclosure.

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